The cops kept an eye on me...
When I stepped off a rescue flight from COVID-plagued Paris last March, I was put in home quarantine. For two weeks I couldn’t go anywhere or meet with anyone.
Had I been seen stepping out my front door, I would have been thrown in jail.
My friends left bags with groceries and other essentials on my doorstep; they’d ring the doorbell and run away. I couldn’t even take out trash by myself.
As it turned out, I hadn’t contracted coronavirus, but I was sure bored to death. And, as have hundreds of millions of Americans since the nation was put on lockdown, I spent countless hours binge watching TV.
With America turned into a horde of couch potatoes, video streaming has been one of this year’s most lucrative businesses. But it has also been by far the most misunderstood investment.
Most Investors Are Betting on the Wrong Horse
You see, you can’t invest directly in most streaming services.
For example, Disney+ and Hulu belong to Disney. Amazon.com owns Prime Video. Apple TV is under Apple (AAPL).
Most streamers are tucked away inside big conglomerate stocks. And being comparably small, streamers have little effect on their owners’ stock prices.
Take Disney+. In its first months, the streamer passed 50+ million subscribers. That’s a phenomenal achievement. For Netflix, it took seven years to pull in as many.
Many investors piled into Disney (DIS) stock in the wake of its success with Disney+. But the stock plunged 18% this year due to losses in its other lines of business.
Now, Netflix (NFLX) is probably the most direct way to invest in streaming. But having soared a whopping 38% this year, the stock has probably run out of steam.
There is, however, another streaming stock that has largely fallen off the investor radar. The stock is powering the entire streaming industry, and yet is down 13% for the year.
But as I’ll explain, the company has quietly laid the groundwork for a revolutionary technology. And after COVID-19 blows over, billions of dollars may start flowing its way.
Have You Heard of Roku (ROKU)?
You may know its name from that little streaming box wired up to your TV. What you may not know is that the company has lately grown into the most influential streaming company.
You see, Roku’s management recently turned its business model upside down. Instead of manufacturing TV streaming boxes, it started putting its software inside TVs.
This software, also known as an “operating system,” can make any TV “smart.” With Roku’s technology, the TV can connect to the internet, download apps, and access streaming services.
It’s like Microsoft’s Windows, but for TVs.
Major TV makers like Samsung, Sony, and LG all use Roku in their latest TV models. According to The Verge, one in three TVs sold in America today contain Roku’s operating system.
Streamers depend on Roku (ROKU) because it's already in just under 40 million TVs. And without its software, they couldn’t broadcast a single show on those TVs.
2020 Should Have Been Roku’s Most Lucrative Year — But It Wasn’t
Last quarter, Netflix, Disney+, Roku and other streamers reported record growth.
Netflix added a record 16 million subscribers, 2X more than expected. Over the same time, Disney+ almost doubled its subscribers from 28.6 million to 50 million!
Roku didn’t fall behind. It signed on 2.9 million subscribers and pulled in record viewership ratings. Its subscribers watched 49% more hours of TV last year.
But sales numbers paint a vastly different picture.
Last quarter, Netflix’s sales grew 27.6% compared to last year. Disney’s jumped an impressive 4X. Meanwhile, Roku’s sales took a head blow and fell 11%, dragging the stock price along.
This disparity comes down to the difference in how these companies work.
Roku Is Not a Streamer. It’s an Advertiser in Disguise
You see, Netflix, Disney+ and other streamers earn money from subscriptions. That means they charge a fee for access to their movies and TV shows. The more subscribers they get, the more sales they generate.
Roku is different.
While it’s often labeled as a streaming stock, streaming is not its actual business. Unlike Netflix or Disney+, it doesn’t charge its customers a fee. 40 million of its customers can use its technology for free.
Roku is, in fact, in the business of advertising. Since 2018, it has been working on a revolutionary TV advertising platform. In short, Roku earns money by showing TV viewers personalized ads.
It’s a smart move because advertising is a very lucrative business. Many top tech giants including Google (GOOGL), Amazon (AMZN), Facebook (FB) built their businesses on the back of advertising.
And it’s already paying off big time. Last year, Roku earned most of its money from advertising. The problem is, now is not a good time for advertisers.
COVID-19 Threw a Wrench in Roku’s Wheels
COVID-19 is not just a health crisis. It’s a financial crisis.
In times like this, businesses tighten their belts and often cut their advertising budgets down to a minimum. This time is no exception.
According to the World Federation of Advertisers (WFA), 81% of the world’s biggest advertisers including Coca Cola, L’Oreal, Unilever, and Visa are shelving their ad campaigns. Even all-mighty Google slashed its marketing budget for 2020 in half!
In other words, most businesses are shying away from advertising. No wonder Roku reported a record slump in revenue last quarter.
But the thing is, it’s just a temporary blip. After this crisis blows over, advertising will inevitably get back on track and Roku’s money-making machine will start revving again.
Every Dog Has Its Day
Netflix may have been the pandemic’s biggest winner. But at today’s valuation, most of its profits have already been claimed. Meanwhile, Roku is still in the early innings.
While the company’s potential is dampened by the slowdown in advertising, it is a matter of time before billions of advertising dollars will start flowing its way.
It’s done a great job pulling in eyeballs, and for now that’s all that matters. Because after ad spending picks up, Roku’s revolutionary TV advertising will milk those eyeballs for years.
And when investors realize what a lucrative business it is, I believe Roku stock stands a chance to grow double digits. If you are betting on video streaming like I do, this stock belongs in your portfolio for the long term.
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